How Argentina’s economy crumbled
How would you like to live in a country with annual inflation over 100% and interest rates near that number? In Argentina, that’s the daily reality as the country grapples with a spiraling economic crisis — inflation there is the third-highest in the world, behind only Venezuela and Lebanon.
The International Monetary Fund has been the country’s financial lifeline for decades now through periods of economic growth and turmoil, but the relationship is — to put it mildly — complicated. Despite doling out billions of dollars, the international financier has never quite succeeded in turning the ship around, largely due to political pushback in Argentina against reforms and other conditions imposed as part of lending agreements.
“In the last few times that the fund has been involved in Argentina, it has always tried to push some of the reform agenda Argentina needs, but that has always failed,” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, said during an interview with Marketplace’s Sabri Ben-Achour. “That story has just been repeating itself over and over and over again. It’s like a ‘Groundhog Day’ type of thing.”
The following is an edited transcript of their conversation.
Sabri Ben-Achour: So Argentina’s economy has been a problem for quite some time. But inflation like this has not been seen since the ’90s, this level of totally insane inflation. What happened recently that made things this way?
Monica de Bolle: So it’s been a cumulative process, as all these things are usually in Argentina. Argentina has been having pretty much the same crisis over and over again for the past, we could say decades, but let’s stick to the last 10 years or so. And within that period, every time the economy falls into trouble, it never quite gets out of trouble. So you know, the problems kind of accumulate to a point where eventually this was gonna happen anyway.
Interest rates at 97%, inflation over 100%
Ben-Achour: The central bank this month hiked interest rates to 97% to try and control inflation, in the same way that the Federal Reserve does here. But here, a 1% increase in rates is startling to markets. In a situation like Argentina, do people just not bother trying to take out loans at all?
De Bolle: Well, pretty much. I mean, what happens in a situation as dysfunctional as the one that is taking place in Argentina right now is that when you have inflation at such high levels — so just to bring the numbers in, currently, Argentinian inflation is running at way above 100% per year. That’s extremely high, obviously. So when you have a situation like that, it just becomes extremely difficult to bring inflation down because what starts to happen in this situation is that people will repudiate the currency. People will no longer trust that the peso, the Argentine currency, will have any value whatsoever going forward. So as soon as they get paid their salaries in pesos, or they get, you know, peso flows from somewhere, they will immediately exchange those pesos into dollars. And once that kind of process is in motion, there aren’t really any policy tools to stop it. So interest rates don’t really do anything.
Ben-Achour: In thinking about how Argentina got here, you mentioned it’s cumulative. But is there some sort of structural cause that explains how we got here?
De Bolle: Yes, there are a few. So on the one hand, the government spends too much. And that’s been a problem in Argentina for many, many years. The other issue is that the economy itself, because it’s been so badly managed for so long, it has really created this situation for people where they’re consistently [untrusting] of whatever policymakers are doing. And therefore, you know, the expectations regarding inflation, regarding fiscal policy, expectations are always on the side of oh, you know, we don’t expect things to get better, we just expect things to get worse, which, again, makes things extremely difficult for policymakers who are trying to bring in this level of trust without which you can’t really fix an economy. And then there’s a third problem or third dimension of the problem, which is because of this lack of trust, you know, people end up not really wanting to hold their own currency for very long, so they use a lot of dollars. And the Argentine economy, therefore, is a very highly dollarized, as we call it, economy. And what that does is that it’s continuously making the Argentine currency depreciate against the dollar. And that, in turn, puts pressure on inflation. So you get these vicious circles that sort of install themselves everywhere. And, you know, eventually it runs up inflation to a level that is, you know, completely unsustainable, such as the one that we see now.
A history of failed IMF interventions
Ben-Achour: What is the IMF’s role in all of this? The last arrangement it had with Argentina was to loan it $44 billion. That’s not the first time the IMF has intervened.
De Bolle: No, so the IMF has a very long and very complicated history with Argentina. And by and large, I guess we can say that the IMF has a very unsuccessful history with Argentina because at no point has the IMF ever been able to really help out policymakers in sort of solving the problems for good. That is a little unfair, I guess, in a way to say about the IMF, because obviously a country’s problems are a country’s problems and there’s so much of fixing a problem that requires, you know, the political system and proper functioning of the political system, and that’s certainly something that’s been a huge issue in Argentina for many years. In the last few times that the fund has been involved in Argentina, it has always tried to push some of the reform agenda Argentina needs, but that has always failed. So if we look back to, say, 2015 or 2016, when the former president [Mauricio] Macri was in power, and you know, that was the first time that Argentina really reengaged with the fund after a long period of nonengagement. The fund there was really trying to help, you know, and to see if they could set in motion a virtuous — as opposed to vicious — process. But again, the political problems got in the way. In the end, the president lost political support. And that fund program failed. So that story has just been repeating itself over and over and over again. It’s like a “Groundhog Day” type of thing.
Ben-Achour: Well, what kinds of reforms or conditions does the IMF want to see or impose when giving a loan? And why are they so politically unpopular?
De Bolle: So the most important ones are reforms that have to do with controlling spending and reforming Argentina’s tax system, which is usually inefficient and therefore fails to deliver fiscal results that are sustainable over time. And the big problem, or at least one of the big problems, that Argentina has is that spending isn’t really controlled by the central government. The provinces in Argentina are very autonomous, which means that they can make decisions over fiscal spending, which don’t necessarily have to be consistent or are not necessarily consistent with what the central government wants to do. And then it all comes down to a political issue, right? So consistently, what you see is Argentina will try to get back on track when it comes to spending. The central government will make some kind of commitment in terms of reining in spending growth, and you know, that sort of thing. But then, you know, the provinces will start spending more. And it is very hard for the central government to control that because of the way that the political system works. And since politics in Argentina have become, as they have everywhere, increasingly polarized, that process has become ever harder.
Ben-Achour: Why does the IMF keep lending Argentina money? I mean, if it is “Groundhog Day,” as you’ve described it?
De Bolle: Well, that is a very good question. And that is the question that often comes up. The problem is that Argentina owes the fund a lot of money. And so at the end of the day the fund is sort of caught in a situation where, if it doesn’t help Argentina, it’s not going to get paid because the country really can’t get out of this crisis by itself. And if it helps Argentina, well, it’s still in a bind.
A rocky path back to normal
Ben-Achour: Is there any way for Argentina to find its way back to some kind of normal economy? I mean, is there any route there?
De Bolle: There are routes, but the routes are very, very difficult, and they involve a lot of political will, which is something that’s evidently missing. But what would they be? So there are a number of other cases in the region that have dealt with hyperinflation in their own pasts. And they were able to resolve those problems permanently. One such case, obviously, is Brazil, which had very long hyperinflation that ran for over 20 years. And they were only able to solve that situation in the mid-’90s. But when they did, they resolved it permanently. It involved a lot of reforms, including a very deep financial, monetary and currency reform. And you know, but it worked. And it worked in many ways because there was political will at the time for it to work. In Argentina, you would probably need something as deep as what was done in Brazil in the mid-’90s in order to put the country on a normal track. But as I was saying in the beginning, that involves people from different political parties and different political leanings coming together and agreeing to find this common solution together, even if they don’t agree with some of the measures that might be needed or some of the reforms that might be needed. But with this level of polarization that we see everywhere, including in Argentina, it’s very hard to see how even in the face of a deep crisis, such as the one that the country is facing now, how is it that these politicians come to an agreement. Because without that agreement, you can’t really do much.
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